Post-boom policy paralysis looms

So what comes next?
Wayne Swan
may still be happily congratulating himself and the government on the relative strength of the Australian economy. Just about everyone else, particularly in business, suddenly seems a lot more concerned about how things will look in a couple of years’ time.

That’s after the peak of the massive physical investment in resources projects has passed, along with the peak in commodity prices already gone. The question is whether demand in the rest of the domestic economy will be ready to take up the slack or whether there will be a big gap.

Glenn Stevens
says the Reserve Bank of Australia attempts to answer this every month when the board sits down to decide on monetary policy. Plenty of people argue that the RBA gets its response badly wrong at times.

But Stevens maintains the much bigger question long-term is not the monthly interest-rate decision but just what is the “sustainable growth rate’’ of the economy. That answer doesn’t depend on monetary policy or even what the RBA governor calls the “exceptional luck’’ of rising mineral prices in recent years. It is about lifting productivity.

The catch, as Stevens points out, is that “productivity does not rise simply because of exhortation or official pronouncements’’. Not that this stops pronouncements coming.

According to much of the political rhetoric, Australian investment in areas like education, training, skills, workplace relations, the national broadband network, superannuation, health and “clean’’ energy is guaranteed to produce a smart, efficient and productive nation striding forcefully into the centre of the Asian century.

Yet the mismatch between big dollars and mediocre results only seems to be widening. That will become even more apparent when the high tide of resources investment recedes in 2013 or 2014 with little evidence of what will take its place.

So while it’s true that the terms of trade remain terrific by historical standards, and the volume of commodities exports will continue to increase, Stevens says we can no longer rely on them to add to growth in living standards.

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Resources Minister
Martin Ferguson
has also been warning for months that the boom in prices has ended even if there is still a lot of investment going on. He says the challenge for the country is whether it will get the next massive wave of more than $200 billion in investment in projects proposed but neither started nor certain to proceed given Australian costs.

Stevens also sounds cautious.

“Some important parts of the resources sector have now reached a point where the costs of further expansion in capacity, relative to those that might be expected elsewhere in the world, are a much more important factor in investment decisions than they were a couple of years ago,’’ he said in a speech this week to the Committee for Economic Development of Australia. It was bravely entitled “Producing Prosperity’’.

Part of that rise in costs is due to a stubbornly high exchange rate rather than particular domestic failures in terms of productivity levels. The exchange rate is affecting much more than the resources industry, of course, struggling areas like manufacturing and retail and domestic tourism being further battered by the impact.

But this is still not enough to explain the gap between what Australians expect to achieve from what should be a sophisticated, efficient, innovative economy and workforce, and what seems likely to be delivered.

The Deloittes global manufacturing competitive index yesterday talked – once again – about better links between high- quality research and manufacturers in Australia, focusing on high value-adding and niche manufacturing. That may happen in some cases but only haphazardly.

Plenty of business leaders are keen to have a more coherent conversation about the reasons for the more general sense that Australia is missing out on opportunities to build the economy of the future. That goes well beyond obvious dismay at an inefficient industrial relations system that is only becoming more rigid and more costly.

At the recent Australian Resources Conference in Perth, for example, one of Australia’s most globally successful companies also focused on a failure to leverage the country’s strength in energy and resources to develop a culture of globally recognised technical expertise.

Ian Wilkinson of WorleyParsons – which services resources projects all over the world – talked about the high cost of Australia engineers relative to anywhere else. But he compared this with another high- cost country like Norway that still managed to build its oil and gas industry based on its competency in geophysics and maritime operations and construction. Canada, he said, had built skills and reputation around gas processing. He wants Australia to develop a similar level of local capability on the back of this “boom" to ensure a legacy of the “smarts" to export too.

Such progress can only happen with close and realistic business and government co-operation. Hmm.